• Physical Supply/Demand Conditions in Many Commodity Markets Are Still Tight
• Talk of QE3 Pushes Gold Towards the January 1980 Inflation-Adjusted Peak

TORONTO, Aug. 24, 2011 /CNW/ - Scotiabank's Commodity Price Index, which measures price trends in 32 of Canada's major exports, rallied back 0.8 per cent month over month (m/m) in July to a level just 2.0 per cent below the April 2011 near-term peak. The All Items Index was still a solid 26.1 per cent above a year earlier and 56.7 per cent above the April 2009 cyclical low.

"Commodity prices will likely lose ground in August, as economic growth forecasts for the United States and the Euro zone are marked down sharply," said Patricia Mohr, Vice-President, Economics and Commodity Market Specialist at Scotiabank. "However, ongoing demand growth in the emerging markets — particularly China — will provide considerable underpinning as will ultra-low interest rates. Physical supply/demand conditions in many commodity markets are still tight — especially in copper, iron ore, the grains and oilseeds and fertilizers such as potash."

"In judging the outlook for industrial commodities, it is important to recognize the massive dominance of China," noted Ms. Mohr.  "In the case of copper, China's consumption represents 37.3 per cent of world demand — 1.26 times the combined total of the United States, Western Europe and Japan at 29.5 per cent. The comparison is even more striking for aluminium, the biggest volume base metal; China's consumption accounts for 43.7 per cent of the world total — 1.56 times the 28.9 per cent of the United States, Western Europe and Japan combined.  While sub-par growth in the United States and the Euro zone will no doubt slow metal-intensive manufacturing activity in China, which has benefitted from huge G7 outsourcing in the past decade, China's growth, under the new 12^th Five-Year Plan, will increasingly be driven by internal domestic demand as well as expanding intra-Asian trade."

The Metal and Minerals Price Index led the overall gain in July (up 1.6 per cent m/m). LME copper prices jumped from US$4.10 per pound in June to US$4.36 - only 5.2 per cent below the all-time record high of US$4.60 on February 14, 2011.  While prices have recently eased, China stepped up its buying again on the LME in early August and prices have rallied back to US$4.02, yielding exceptional profit margins for mining companies (66 per cent).  While China's underlying demand for copper may slow in the third quarter, after a strong 10 per cent advance in the first half of the year, prospects for a further advance in copper prices in late 2011 remain intact.  Copper is in a supply deficit, that is world consumption exceeds supplies, a development likely to last through much of 2012.

The report notes that aluminium - an important export from Canada— is also a growth sector, with world consumption expected to advance 9.7 per cent in 2011 and 8.5 per cent in 2012, led by China.

Spot gold prices surged to a new record high of US$1,913.50 per ounce in intra-day trading on August 23, 2011, climbing towards the inflation-adjusted peak of US$2,456 on January 21, 1980 (US$850 in money of the day terms). The Fed Chairman may signal a third round of asset purchases to boost a faltering economic recovery at its annual symposium in Jackson Hole, Wyoming this Friday (not guaranteed).  The Fed announced QE2 at the same meeting a year ago.  Stepped-up liquidity may eventually prove inflationary.

The fundamentals for potash also continued to strengthen during recent equity market turbulence.  Spot potash prices (FOB Vancouver) for overseas sales in Southeast Asia and Brazil/Latin America climbed from US$481 per tonne in June to US$490 in July and remain at that level this month (up 43 per cent year over year). In early August, Canpotex agreed a sales contract with buyers in India (shipments from October through March 2012) at higher average prices than previously negotiated with China.  World potash shipments are expected to climb to 58 million tonnes in 2011, back to the previous peak in 2007.

Ms. Mohr also notes that potash supply/demand conditions should tighten further in 2012, with onward growth in global consumption in the face of only limited mine and mill expansion. Canada's largest producer will lead world capacity expansion through 2015.

The Oil and Gas Price Index steadied in July (up 0.1 per cent m/m and 24.3 per cent above a year ago). After falling to US$96.29 per barrel in June, WTI oil prices firmed up to US$97.34 in July. However, oil prices — which are often buffeted by macro-economic developments and risk-off equity market selloffs — have lost ground in August, averaging US$86. The physical supply/demand balance for crude oil appears to be much tighter than mirrored by current prices.  Prices should rally back in the next six months.

Finally, the Agricultural Index eased slightly in July (-0.9 per cent), as the Canadian Wheat Board's asking export price for No.1 grade wheat lost ground in anticipation of new crop supplies, more than offsetting strength in canola, barley and cattle/hog prices. However, the decline in wheat is likely temporary, with prices expected to firm seasonally in the Fall. Severe drought on the Plains of Texas and Oklahoma is cutting expectations for the 2012 Hard Red Winter wheat crop, boosting U.S. prices in recent days.  According to the U.S. Department of Agriculture, world production is lagging behind consumption for the three major crop segments - wheat, coarse grains (feed grains) and soybeans - despite some improvement in Russia's crop this year.  The world stocks-to-use ratio will decline for all three segments in 2011-12, a positive development for fertilizer application.

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